Memorandum to President Barack Obama and Members
of Congress Overseeing the Federal Trade Commission and the newly created
Consumer Financial Protection Bureau:
A Whistle Blower's Guide to
^Business Opportunity Fraurf
How the FTC Ignored and Now Protects It
WOKKlNf. l-'OR CONSUMER PROTECTION
AND A COMPETITIVE MARKETPLACl:
by Robert L. FitzPatrick, Pres.
Pyramid Scheme Alert
©2010 Robert L. FitzPatrick
1800 Camden Rd. Ste. 107 #101
Cliarlotte, NC 28203
Table of Contents
The Main Street Bubble
Memorandum to President Obama and Members of Congress i-8
I. The FTC's Role in Promoting and Protecting
Biz Op Frauds
1. Background and Overview 9
2. FTC Protection of Pyramid Selling Schemes 13-16
1) Reassignment of FTC's Internal Expert on Pyramid Schemes 13
2) Official Policy of No More Pyramid Scheme Prosecutions 13
3) No Enforcement of Past FTC Orders against MLMs 14
4) Obscuring the Longstanding Interpretation of Section 5
of the FTC Act that a Multi-Level Marketing Scheme
without Significant Retail Sales Is a Per Se Fraud 14
5) Colluding with Pyramid Lobbyists 15
6) Influence Peddling 15
II. The Political Influence of the Pyramid Lobby i7-20
III. Conclusion: Business Opportunity Scams,
the Cruelest of Frauds 21
London Times Article i
State Journal Register Article ill
Author's Biography vii
1800 Camden Rd.
Ste. 107 #101
Charlotte, NC 28203
r~ Z Vi '~Z- ^ 17 info @PyiamidScheme Alert .org
International Association to Expose, •' '^
Study and Prevent Pyramid Schemes www.PyramidSchemeAlert.org
PYRAMID SCHEME ALERT
Date: October 7,2010
To: President Barack Obama and Appropriate Members of Congress
From: Robert L. FitzPatrick
Re: Main Street Bubble
We recently witnessed shocking revelations of how our Securities & Exchange Commission
(SEC) failed America in the regulation and prevention of financial Ponzi schemes on Wall Street.
I urgently bring to your attention a parallel pattern that has prevailed for ten years at the Federal
Trade Commission (FTC), a failure to protect Americans from Ponzis and pyramids on Main
Street. These Ponzis are spread not as investment plans, loans or credit offerings but as "business
opportunity" solicitations that promise extraordinary income potential. They are now the most
common form of financial fraud that citizens fall victim to. During this recent period of
regulatory immunity, the schemes have collectively and over time inflicted losses on Main Street
consumers that dwarf those of Bernard Madoff's Wall Street investors. The recent Recession has
given the schemes additional predatory momentum as millions more people have become
unemployed, face foreclosure and are in desperate need of income.
Oversight is immediately needed at the FTC. Additionally, the new Consumer Financial
Protection Bureau must include these Main Street schemes in its coverage of "financial products."
The financial products sold to consumers in Main Street Ponzis entail consumers paying fees and
related costs, signing a complex and lengthy legal contract, surrendering many legal rights
otherwise available to consumers, restrictions on pricing that result in price gouging, and
incurring longer term financial and legal liabilities or restrictions. Additionally, as further
evidence that these schemes primarily sell a common financial product, not their advertised
consumer items, most of them have strict non-compete clauses in their contracts prohibiting the
consumers from investing or working with all other schemes of the same type, regardless of the
product they offer. The purveyors of these financial products are, therefore, a clearly identifiable
The sales of "business opportunities," are most frequently disguised as "direct selling" and
referred to as "multi-level marketing" (MLM), "home-based" sales, network marketing or
pyramid selling schemes. They are egregious violations of Section 5 of the FTC Act as "unfair
and deceptive trade practices." Yet, in 2001, the FTC virtually stopped investigating and
prosecuting - and therefore de facto legalized - these types of scams. Consequently, they have
multiplied in number, spread globally and become more aggressive in their solicitations.
For purposes of this report, they will be referenced by the name commonly used by regulators -
Biz Op frauds. Collectively, they represent an enormous and highly manipulated financial bubble
- billions of dollars invested in worthless or grossly overvalued assets - the Main Street Bubble.
The Main Street Bubble is inflated by hundreds of pyramid selling schemes and a related
network of "cash gifting schemes." Each year it expands with billions in investment dollars and
the futile hopes, efforts and manipulated dreams of millions of Americans who are lured into
The Main Street Bubble 2
them. Like all bubbles, the hoped-for returns are based on the deceptive and deluded projection
of endless expansion. And, as in all bubbles, the losers are left with largely worthless assets, lost
funds, squandered time and, frequently, more debt. Many people are financially ruined. The
overpriced purchases and payments made by participants, along with costly, time-consuming and
futile promotional efforts on behalf of the pyramid company, are revealed, in retrospect, to have
been motivated by their perceived future value, which had been falsely advertised as
Wall Street bubbles typically inflate rapidly and then collapse suddenly and totally. They may
later re-emerge over a number of years in a new form, shifting in appearance but not substance,
from stocks to real estate or some other commodity or from one security to another.
The Main Street Bubble, in contrast, inflates, collapses and re-inflates continuously , year after
year. The majority of the "losers" are cycled out annually and the bubble is sustained with the
concurrent recruitment of new investors and those reinvesting. The bubble is maintained and
allowed to grow each year under the current protective policies of the Federal Trade
Commission. With political protection allowing it to continuously reconstitute, the Main Street
Bubble enjoys a permanent bailout. It functions as a constant drain of funds and energy at the
Main Street level. Money from 99% of consumer investors (the proverbial last ones in) is
systematically transferred to the scheme's owners and 1% of the promoters, the equivalent to
Wall Street's Ponzi operators and feeder funds.
After years of no regulation, ubiquitous solicitations, publicized "success stories," and
orchestrated lobbying in which pyramid selling schemes are falsely depicted as viable income
opportunities for millions of consumers or a unique business sector that produces a
disproportionate percentage of millionaires, some consumers and legislators dismiss news of a
99% loss rate among all consumers who join the schemes. Reality clashes jarringly with myth.
The scale of government neglect, the scope of the deception and consequent public harm are too
much for many people to accept. It is indeed an "uncomfortable truth." Yet, the truth of these
loss rates has been known and statistically verified for many years.
• In the early 1980s former Wisconsin Assistant Attorney General, Bruce Craig, brought fraud
charges against Amway, the largest MLM operating in that state. During the case, he
obtained and reviewed tax returns of all of Amway' s active distributors in Wisconsin. The
losses revealed by the tax returns were shocking even to the prosecutors. The "active" direct
distributors constituted the company's top representatives in income. Yet this group's tax
returns showed an average net income of minus $900. Those earning a net profit were far less
than 1% of the total consumer participants. Asst. Attorney General Craig was later
interviewed on the 1982 CBS 60 Minutes expose of Amway entitled "Soap and Hope" where
the findings were reported.'
' From the transcript of the 60 Minutes show:
CRAIG: We're charging them with deceptive business practices because of the use of those hypotheticals because they so vary
from what we feel is REALITY.
WALLACE: [voice over] Bruce Craig investigated some examples used in Amway literature. Examples that said that Amway
distributors could make in excess of $1200 a month. Money that some Amway distributors could be earned with just a few hours
a week. But after looking at the average income of the 20,000 Amway distributors in Wisconsin, Craig came to the conclusion
that such a claim was outlandish.
[to Craig] Surely, SOMEbody's making that kind of money.
BRUCE CRAIG: Yes. That's correct.
WALLACE: How many? Percentage wise.
©2010 Robert L. FitzPatrick
The Main Street Bubble
• In England in 2007, the Department for Business Enterprise and Regulatory Reform charged
that Amway is "inherently objectionable" and must be "wound down" (closed down in USA-
English). The government claimed that Amway violated England's Fair Trading Act 1973
among other laws. The Fair Trading Act 1973 addresses "Get rich quick schemes [operating]
on the same basis as chain letters..." The government based its action largely on its
documented findings that more than 99% of all UK Amway distributors had lost money. This
99% loss rate held true from more than three decades of Amway UK operations and had
inflicted financial harm on tens of thousands of UK consumer/investors.
• A huge database of consumers who have lost money as Amway distributors has been
compiled by whistle-blower, Eric Scheibeler, author of Merchants of Deception, a book
about deception in Amway 's solicitation campaigns. Scheibeler was involved in Amway for
nearly a decade and reached the upper level of Amway 's pyramid hierarchy. When he
presented direct evidence of deception and massive consumers losses to Amway officials he
was driven from the company, vilified and sued. His database now has thousands of verified
and documented reports of losses from consumers all over the world, including more than
200 from Australia and, increasingly, many coming in from China. ^
• The 99% rate is by no means limited to Amway, but rather occurs among all MLM
companies that employ Amway's "endless chain" pay plan and in which few distributors
earn profits from retail selling. The pyramid structure, lack of sustainable retail sales and "top
loaded" pay plans (the majority of commission - per sale - is transferred to the top levels of
the recruitment chain) guarantee these loss rates. Most MLM companies employ the
Amway-type pay plan and fit this description. Pyramid Scheme Alert compiled statistical
data on commission payouts disclosed by 1 1 of the largest and better known multi-level
marketing companies, including Amway. The data revealed that the 99% loss rate held true
for all of them. ^
Collectively and over time the Main Street Bubble far exceeds Bernard Madoff's Wall Street
fraud in scale of financial harm. An estimated $10 billion per year are lost by US consumers.
Worldwide, the figure is far higher, with most losses inflicted by US-based companies.
As in Bernard Madoff's "hedge fund," the value of the consumer investments in the "direct
selling" schemes depends on the continuous enlargement of an investor base. When Madoff's
bubble suddenly burst most investors realized their losses immediately. But, as prosecutors and
whistle blowers revealed, the investments of nearly all were actually lost the day they were
BRUCE CRAIG: About one percent.
WALLACE: [voice over] Amway DID make the disclaimer that $1200 a month was ONLY hypothetical but that still doesn't
convince Bruce Craig.
BRUCE CRAIG: If the figure of successful distributors was 1 out of 5 as opposed to 1 out of 100 we wouldn't be in court right
WALLACE: [voice over] And, Craig says that even the distributors who, on paper, earn an average of $14,000 dollars a year in
Wisconsin actually earn a lot LESS. How much do they actually make?
BRUCE CRAIG: After business expenses, a net income of minus $918.
WALLACE: WAAAAIT a MINute! The direct distributors who make a gross income on average of over $14,000 wind up losing
almost $1000 after business expenses?
BRUCE CRAIG: On average. Yes.
^ See http://www.merchantsofdeception.com/
^ The data supporting the 99% loss rate and the concentration of commission rewards to the top 1% is available in
the report "The Myth of MLM Income Opportunity" which examined payout data on eleven MLMs. See
©2010 Robert L. FitzPatrick
The Main Street Bubble 4
placed with Madoff. This is because his investment fund operated as a Ponzi scheme. It was only
disguised as a hedge fund. Returns were not generated from profitable trades but from a money
transfer of later to earlier investors. Such a money transfer plan dooms most investors by design.
Similarly, the Main Street Bubble is composed of investments ranging from hundreds to tens of
thousands of dollars from millions of consumers seeking the "income opportunity" that the
schemes dramatically portray and aggressively solicit investors to join. This income opportunity
is disguised as a "direct selling distributorship." In reality, the "business opportunities" are
pyramid schemes. The investors are told they are investing in "distributorships." In fact, returns
are not generated from profitable and sustainable retail selling, which real distributors do, but
from each distributor recruiting many new distributors.'* Effectively, the same unprofitable
distributorship is simply resold continuously. The money transfer is laundered through sign-up
fees, costly "marketing tools" and induced or mandatory purchases of often absurdly inflated
products. This system, advertised as a "business opportunity," inflicts documented financial
losses on 99% of all consumer/investors each year.
Each consumer/investor in the Main Street Bubble experiences the inevitable financial loss
individually, not as part of a group of victims such as in the Madoff Ponzi. No group awareness
develops, which might help warn future investors. Main Street victims seldom learn the nature of
the fraud that harmed them, which at least the Madoff victims understood. Though most suffer
enough loss in the first year to quit the schemes, some may continue to pursue the "dream" for
years in a futile effort to solicit new consumer investors or they move from one scheme to
another. These believers suffer far larger losses. Yet, as in the Madoff scheme, their investments
are actually doomed from the day the consumers join the schemes because of the pyramid
structure, impossible recruitment requirements and the unsustainable money transfer system that
siphons funds to a handful of promoters at the top.
The Main Street Bubble is not hidden. Indeed, the schemes operate in plain sight. As many as ten
million Americans are lured to invest in them annually. Solicitations to join them are everywhere
now - in churches, at the office, in the neighborhood. They inundate the Internet. USA Today
recently reported that YouTube now features nearly 23,000 "cash gifting" videos. The London
Times has referred to America's Biz Op Pyramid schemes as the "poor man's Ponzi scheme."^
Others compare them to a form of economic cancer. The schemes multiply in number each year,
financially devouring savings and investments of millions of consumers. Participants are induced
to prey upon their very own friends and family to recoup their investments from their recruits '
lost investments. Tragically, for millions of Americans the pursuit of these direct selling schemes
is now viewed as a pursuit of the American Dream, which the Main Street Bubble has hijacked.
The multi-level marketing (MLM) Biz Op schemes gain little media attention because they have
enjoyed de facto government endorsement over the last ten years. The news media is faced with
a dilemma of accusing, not exposing, them. Journalists routinely raise the question of
fraudulence and economic harm when reporting the schemes, but they have few authoritative
sources to reference. Many investigative writers fall back on anecdotes of consumer losses but
** It is important to grasp that the absence of retail sales in a "direct selling" business opportunity scheme is not an
infraction or an excess or an abuse. Rather, it fundamentally alters the business from legitimate direct selling to a
"closed market" in which the vast majority of participants cannot succeed, since endless expansion of "distributors"
is impossible. It is this type of "non-retailing" multi-level marketing scheme, that prevails among the members of the
Direct Selling Association (DSA).
^ See full London Times article, "Pyramid Swindlers Unmasked," February 1 , 2009, in the Appendix.
©2010 Robert L. FitzPatrick
The Main Street Bubble
also inevitably include, for "balance," the rare instance of one who made a great deal of money
in the scheme.*
Consequently, the American public is left largely in the dark and sadly misled. The prevailing
media and government message is the myth that MLM is a viable, legal and perhaps, as the
promoters claim, the consumer's best chance for income in troubled economic times. Those who
do confront reality after being harmed are mostly silenced by shame or fear into accepting losses.
If they overcome these obstacles they still have limited recourse for restitution. Private lawsuits
are beyond the means of most. Regulators routinely ignore complaints. Independent whistle
blowers, at great cost to themselves, have provided facts and analysis to the media and, in vain,
to the FTC. Other consumers have sought justice in class action lawsuits.^ Some fraud
investigators and financial analysts have also warned investors, the FTC and the SEC about the
pyramid selling schemes that sell securities on major stock exchanges.
The FTC has direct federal regulatory oversight over multi-level marketing. This oversight was
effectively abandoned in 2001 following President George W. Bush's appointment of Timothy
Muris to chair the FTC. At that time, Muris was an anti-trust lawyer whose largest client was the
multi-level marketing company, the Amway Corporation. In addition to being the icon and
business prototype of nearly all other multi-level marketing companies, Amway is one of the
most politically influential corporations in America with powerful ties to the previous George W.
Bush administration and to the National Republican Party. Amway 's paramount lobbying goal is
to shield itself and other schemes of its type from FTC fraud investigation. To prevent
prosecution it has engaged in influence-buying on an extraordinary level (details of Amway 's
and the "pyramid lobby's" influence-buying are included later in this memorandum).
Under Timothy Muris, the FTC went beyond what the SEC did in terms of lax law enforcement
and regulatory negligence of Wall Street. It effectively legalized this form of Main Street
business fraud. This was achieved, not by vote of FTC Commissioners, some of whom may have
been unaware of the policy change, but primarily by staff actions under the chairmanship of
Muris and continues to date. These have included:
• Effectively halting investigations and prosecutions of pyramid selling schemes.
* The rare "winners" in MLM are not the result of their special talent, ambition or persistence as MLM schemes
routinely claim. Nor are they the outcome of mathematical odds in open market competition. Rather, they are
intrinsic to the design. 99% of consumer/investors must lose for a tiny group at the pyramid's peak to gain as
"commissions and profits." Their "success" is not evidence of the scheme's potential opportunity for the others but
the impossibility of that opportunity. The system is closed. Value is not exchanged. Money is merely transferred.
' In the past, the FTC utilized class action lawsuits to support prosecutions and as reasonable cause to open
investigations. Today, though numerous class action suits have been filed against major MLMs such as Amway,
Herbalife, Usana, Pre-Paid Legal, and others - all making the same charges of pyramid fraud - the FTC has not even
opened investigations. In one previously settled class action lawsuit brought by consumers against Herbalife, 2,700
former distributors filed claims with aggregate losses totaling approximately $19 million. The suit charged Herbalife
with operating a pyramid scheme and using false and misleading claims about income to lure investors. (Nancy
Jacobs, Individually on behalf of herself and all others similarly situated, and on behalf of the General Public, Plaintiff, vs.
Herbalife International, Inc., et. al., Class Action Complaint, Feb. 15, 2002 filed before the US District Court for the Central
District of California, Los Angeles Division).
Even state prosecutions do not prompt FTC action against MLMs. The Attorney General of California brought suit
against a large MLM, Your Travel Biz.com (YTB), which is a member of the Direct Selling Association. The
Attorney General called YTB "a gigantic pyramid scheme." The FTC has not responded. See
©2010 Robert L. FitzPatrick
The Main Street Bubble 6
• Consistently failing to monitor companies that had been issued enforcement orders by
earlier FTC Commissions and are blatantly violating these orders.
• Issuing a widely circulated letter that obscured and appeared to permit practices - paying
rewards for "endless chain" recruiting without retail sales as a revenue source - that the
courts, and 30 years of earlier FTC policy have declared are illegal.** The letter was used by
MLM companies to persuade millions of consumers that previous FTC policies and court
actions that defined pyramid selling fraud were no longer valid.
• Consistently ignoring consumer requests, complaints, class action lawsuits, international
regulatory actions and media exposures concerning fraudulent business practices of US-
based multi-level marketing companies.
• After taking public comment on a proposed FTC rule, which had been years in the making,
to protect consumers from fraudulent "business opportunity" schemes, the staff rejected
further comments from whistleblowers but at the same time held an ex-parte meeting with
the MLM lobbying organization, the Direct Selling Association, which was seeking to
exempt all MLM companies from the rule.
• Following the meeting, the FTC staff recommended that MLM companies would be
exempted from any new rule to regulate business opportunity frauds. This ruling was made
even though multi-level marketing schemes overwhelmingly constitute the most common
form of "business opportunity" frauds that consumers encounter and MLM schemes have
been the source of numerous FTC prosecutions.
• In recent years, a new pattern of revolving door work has developed between the FTC staff
and MLM lobbyists. Key FTC staff have taken jobs with law firms that represent the multi-
level marketing schemes. The former chairman of the FTC, Timothy Muris and the former
head of Consumer Protection, J. Howard Beales (appointed by Timothy Muris while he was
FTC Chairman) worked as MLM lobbyists to influence the FTC against regulation of multi-
level marketing. Another Director of Consumer Protection, Jodie Bernstein, subsequently
became a lobbyist for the Amway Corporation, and has urged the FTC to exempt Amway
and similar schemes from any new rules over business opportunity frauds.
* The judicial foundation for the FTC to prosecute MLM endless chain schemes is clear and well established. It was
cited in one of the last significant prosecutions that the FTC undertook, before the Bush administration placed a
protective canopy over them with the appointment of former Amway attorney, Timothy Muris, as FTC Chair.
Count 5 of FTC Complaint against the large MLM, Equinox International, filed in the United States District Court,
District Of Nevada, August, 1999, stated, "the Equinox program is an inherently unlawful scheme whose essential
element is the payment by participants of money to the company in return for which they receive (1) the right to sell
a product, and (2) the right to receive in return for recruiting other participants into the program rewards which are
unrelated to the sale of the product to the ultimate users. . . . The result of the structure and operation of the program
is that financial gains to Equinox participants are primarily dependent upon the continued, successive recruitment of
other participants. . . This type of scheme is often referred to as a pyramid."
In his formal declaration that concluded Equinox was a pyramid scheme, FTC pyramid expert. Dr. Peter Vandernat
wrote at that time, "In distinguishing between a pyramid scheme and a legitimate business, the critical issue is
whether rewards paid in connection with recruitment are tied to, or are derived from, the sales of goods and services
to the general public (i.e. retail sales)... The Koscot case affirmed the stated issue to be the critical factor. Later,
cases such as Webster v Omnitrition and Gold Unlimited affirmed Koscot. In Webster the court also found that for
pyramid analysis the sales that are made to a distributor's downline do not count as retail sales. A "retail sale" refers
to a sales of product to general consumer, i.e., someone who is not a member of the organization."
©2010 Robert L. FitzPatrick
The Main Street Bubble 7
Business opportunity frauds, structured as multi-level marketing schemes, are insidious as well
as financially destructive because they lure consumers to spread financial harm among close
friends and relatives, the "warm list" of recruits, as they are termed. The schemes operate by
exciting misguided dreams and false hopes of a secure financial future through financial
investments in the schemes. These deceptive promises lead many consumers to forego jobs and
education, to incur additional debt, and to commit months or even years of time in what are
carefully crafted financial traps.
Most, but not all, members of the Washington, DC-based lobbying group, the Direct Selling
Association, now operate under the Amway "business model." The Amway model, under FTC
protection, has come to dominate and corrupt the direct selling industry.
Endless chain frauds are illegal under many state statutes and in some countries. Lacking FTC
support, few states can prosecute the large schemes, due to limited resources. The schemes now
operate with relative immunity from prosecution.
The true effect of these Main Street frauds is even more destructive since $10 billion is filched
from the middle class, least able to afford losses. The schemes claim perfect legality and, just as
Bernard Madoff did, they cite the lack of federal prosecutions as proof of their legitimacy.
While our government seeks to repair America's tarnished reputation abroad, the FTC's policy
has resulted in US-based pyramid schemes damaging US credibility internationally. Most MLM
companies operating worldwide are US-based.
• In 2005, China, America's largest economic competitor, banned this US-sanctioned MLM
business model entirely.*^
• In 2006, England sought to close down the Amway Corporation, the largest US MLM
operating in that country, on the grounds that it harmed the public.'"
• Sri Lanka recently passed new anti-pyramid scheme laws aimed at curbing the exploitation
of its poor citizens by MLM schemes, most of which are from the USA.
• Government officials in India have raided Amway offices and now brought criminal charges
against Amway for operating a pyramid scheme."
• Other MLMs that operate under the model that the FTC now allows, have been prosecuted
in others countries for fraud. '^
While this memo may be read as alarmist, I ask you to consider that SEC whistle-blower, Harry
Markopolos, was viewed similarly. And, just as a charge of fraud against prominent, politically-
connected figures may seem far fetched to some, I ask you to remember that Bernard Madoff
was viewed as above reproach by many in the government, media and investor community. I
also ask you to recall that, using fraudulent accounting, Enron grew to become our 7* largest
company and its CEO, Kenneth Lay, held celebrated business credentials and political
connections at the very highest level.
Ferreting out and confronting fraud that is imbedded within the fabric of the legitimate
marketplace and affiliated with elected leadership requires courage and will. Revealing fraud
©2010 Robert L. FitzPatrick
The Main Street Bubble 8
inevitably triggers collapse, loss and outrage. However, as the Madoff debacle has shown, lack
of action leads to even greater harm.
While the government works to rescue our economy from Recession and financial chaos, the
spread of false "income opportunity" schemes subverts the economy, misleads and confuses the
public, obstructs the goal of renewed productivity and entrepreneurship and impoverishes
millions of people.
Two actions are immediately needed:
1. Congress needs to direct the FTC to renew investigation and law enforcement against
Main Street Ponzis, disguised as "direct selling" and "multi-level marketing."
2. The newly established Consumer Financial Protection Bureau should be empowered to
investigate pyramid selling schemes as purveyors of "financial products."
I ask you to please review this outline of facts and events that reveals the tragedy of the Main
Street Bubble, in which millions of Americans are taken advantage of by business opportunity
Robert L. FitzPatrick, Pres.
PYRAMID SCHEME ALERT
©2010 Robert L. FitzPatrick
The Main Street Bubble
I. The FTC's Role in Promoting and Protecting Biz Op Pyramids
1. Background and Overview
It is a sad but true fact that there is nothing new about a regulatory agency cooperating or
colluding with an industry it regulates. Regulators have bent laws, loosened rules or granted
favors. Experience has repeatedly revealed this kind of corruption and the consequences have
also been repeatedly demonstrated. When the corrupting behavior passes certain thresholds of
abuse, enormous harm follows. The SEC's lax oversight of Wall Street is the clearest example.
The FTC's collusion with business opportunity schemes between 2001 and 2009, however, is in
another category. The FTC's actions since 2001 have been to legalize activities and business
practices that the courts, the states and previous FTC policy have consistently understood to be
illegal. A pyramid scheme is not "abuse" by a legitimate business, or an "excess" of a basically
legal business practice, or just a violation of rules. It is a per se fraud, defined as an "unfair and
deceptive trade practice" in the FTC Act. It is a device constructed to deceive and to harm. This
is what the FTC's policies and action in recent years have protected.
Prior to 1980, pyramid schemes, as a major force in the market, were not widespread. When they
began to appear in the mid 1960s, pyramid selling schemes were widely understood to be classic
frauds and were prosecuted. In 1968, California passed its famous "endless chain" statute, which
has been a model for other states. ''' The endless chain was understood to be not only a fraud for
inducing "business opportunity" investment but also for illicitly driving purchases. Some states
bolster anti-pyramid selling scheme laws with anti-referral discounts statutes. These laws prevent
discount plans that require the customers to recruit new customers in order to gain the advertised
price. In both scenarios the endless chain places the vast majority of all participants at the end of
the chain where profit or discounts cannot be gained. In short, the endless chain was understood
to be a menace to an open and fair marketplace, a corruption of business and a new form of
swindle in the annals of capitalism.
Multi-level marketing schemes combine an endless chain pay plan with a referral-based
discount. Recognizing the impossibility of its income plan, in 1975, the FTC sued to close down
Amway, the first pyramid selling scheme that showed significant growth nationally. FTC
attorneys saw that Amway's endless chain pay plan, by design, doomed most consumers to
losses and it therefore would cause widespread harm. It followed that the promotion of the plan
was inherently deceptive.
" § 327. "Endless chain" schemes
Every person who contrives, prepares, sets up, proposes, or operates any endless chain is guilty of a public offense,
and is punishable by imprisonment in the county jail not exceeding one year or in state prison for 16 months, two, or
As used in this section, an "endless chain" means any scheme for the disposal or distribution of property whereby a
participant pays a valuable consideration for the chance to receive compensation for introducing one or more
additional persons into participation in the scheme or for the chance to receive compensation when a person
introduced by the participant introduces a new participant. Compensation, as used in this section, does not mean or
include payment based upon sales made to persons who are not participants in the scheme and who are not
purchasing in order to participate in the scheme.
©2010 Robert L. FitzPatrick
The Main Street Bubble 10
In 1980, a fundamental shift occurred in America that enabled pyramid selling frauds to
proliferate and begin to spread worldwide. It occurred with the coincidence of two events:
1) The FTC lost its court effort to close down Amway as an inherent fraud. While winning on
its charges that Amway fixed prices and engaged in false income claims, the FTC was
unsuccessful in its effort to prove its case of d. per se pyramid scheme. After a four-year legal
battle, an FTC Administrative Law Judge's ruled in 1979 that Amway, under certain
conditions (commissions are to be paid primarily from retail sales revenue, not from
investments of new salespeople), could continue to operate.
2) Then, Ronald Reagan's administration took office whose official policy was "de-regulation."
The oversight of MLM that was required in the Amway court outcome was not carried out.
New staffers with a de-regulation ideology came to the agency. In the new climate of de-
regulation, the MLM business quickly devolved from the retail selling of products to the
calculated selling of distributorships. The distributorships' value depended upon an endless
chain reward system. Little or no profits were gained from retail selling but from the
investments of future distributorship. ''^
An MLM "industry" developed that operated exactly as the FTC case against Amway had
tried to prevent. Under FTC de-regulation, the requirement of the 1979 decision of the
Administrative Law Judge linking commissions to retail sales was ignored. Retail sales
virtually disappeared. "Direct selling" became the official disguise of a newly invented and
distinctly American business scam. Its chief protagonist was even called "American Way."
Product purchases with inflated prices became the standard M.O. for laundering pyramid
money transfers. Each new distributor was induced to purchase goods each month as part of
the "investment." Then, 40-50% of the price was transferred to as many as 12 levels of
recruiters above, with nearly all of it concentrating in the top tier. Each newly recruited
"distributor" was told that he/she too could recruit an "endless chain" of levels of distributors
below them. The opportunity was said to be "unlimited" and the market potential to be
The new pyramid "business model" spread to all 50 states and expanded to 60 other
countries. This was an American scam on a scale far larger than Nigeria's famous export.'^
Some negative media coverage about consumer losses, false income promises and the operation
of obvious pyramid recruiting led the larger MLMs such as Herbalife and Amway to focus their
businesses outside the USA where there were even fewer restrictions. Without the spread to new
territories, the schemes would have collapsed even without regulation. The schemes have no
repeat "customers". They churn through 50-80% of victims annually, replacing them with new
'** In the prepared statement on "pyramid schemes" presented at the International Monetary Fund's Seminar on
Current Legal Issues Affecting Central Banks, Washington, D.C., May 13, 1998, Debra A. Valentine, General
Counsel for the U.S. Federal Trade Commission stated, "Pyramid schemes now come in so many forms that they
may be difficult to recognize immediately. However, they all share one overriding characteristic. They promise
consumers or investors large profits based primarily on recruiting others to join their program, not based on profits
from any real investment or real sale of goods to the public. Some schemes may purport to sell a product, but they
often simply use the product to hide their pyramid structure... A lack of retail sales is also a red flag that a pyramid
exists. Many pyramid schemes will claim that their product is selling like hot cakes. However, on closer
examination, the sales occur only between people inside the pyramid structure or to new recruits joining the
structure, not to consumers out in the general public." ( http://www .ftc .gov/speeches/other/dvimf 1 6 .htm )
'^ For a comparison of the Nigerian scam with America's version of MLM (now banned in China) see
http ://w WW .falseprofits .com/Americanscam .html
©2010 Robert L. FitzPatrick
The Main Street Bubble 11
ones. The influx of new cash from abroad continued the illusion of sustainability, thus enabling
them to continue recruiting new USA residents, long after markets were saturated.
Today, more than 80% of Amway's and Herbalife's revenue comes from consumers outside the
USA. The global expansion hit a major obstacle in 2005, when China banned the MLM
recruitment model. Effectively, China achieved in 2005 within its borders what the FTC had
sought to do for US consumers 30 years earlier - to protect is citizens from the orchestrated, well
funded, and disguised "direct selling" frauds.
In the mid-1990s through 2000, the FTC began to reassert law enforcement over pyramid selling
schemes. It relied on common sense tests for recognizing endless chain schemes, federal court
rulings and it cooperated with states in identifying and prosecuting them. Nearly 20 cases were
In these prosecutions, one fundamental factor was reconfirmed repeatedly as a criterion for
identifying and defining the pyramid selling scams that masquerade as "multi-level marketing."
This was the same factor identified in the Amway case: retail sales.
Despite the impossible proposition of income based on endless chain recruiting, the Amway
decision of 1979 had allowed the pyramid structure to stand. Regulation and prosecution,
therefore, had to go below the structure and examine how the MLMs operate. The fundamental
role of retail selling became a key qualifier. This approach goes to the heart of the question
addressed in all pyramid and Ponzi investigations: Where does the money for commissions come
Without sustainable and profitable retail sales opportunity for the distributors, the reward money
can only come from one place: the investments of later recruits. Without significant numbers of
distributors earning profits from retail sales, the only way to be profitable in such a scheme is to
engage in hopeless (for nearly all) recruiting. Only by examining this key factor, can the perverse
workings of a pyramid scheme be revealed behind the fafade of "direct selling."
During the 1990's resumption of FTC oversight and prosecutions, FTC Senior Economist, Dr.
Peter Vandernat, became an internationally recognized expert in explaining and analyzing
pyramid frauds disguised as multi-level marketing. He provided declarations and expert witness
testimony on most FTC cases to show how a classic pyramid fraud can be dressed up as "direct
selling." He assisted state Attorneys General cases, explained the analysis to the news media and
assisted consumer watchdog groups that had begun to spring up in support of FTC enforcement.
His declarations and depositions have been widely quoted.
Of special importance. Dr. Vandernat developed a simple "test" for determining the legitimacy
of most MLMs (the test had some limitations but was applicable in much of the MLM industry).
It measured how much retail sales (outside revenue) would have to occur for an MLM to pay
legitimate commissions rather than rewards for illegal pyramid recruiting. The test enabled the
FTC to enforce Section 5 of the FTC Act on multi-level marketing with minimal research and
discovery. Only a few key financial data points were needed to perform the test. In general, in a
typical MLM pay plan, the test usually revealed that at least 70% of all purchases by MLM
"distributors" would have to be resold to retail customers at full retail price in order to generate
legitimate commissions. '*
'* The state of North Carolina imposed a 70% standard in four pyramid scheme cases that it prosecuted in 1999.
Indicating the vast reach of MLM pyramid frauds, the four relatively small MLM companies, Club Atlanta Travel,
©2010 Robert L. FitzPatrick
The Main Street Bubble 12
Dr. Vandernat also co-authored the only academic paper that explains how to distinguish a
legitimate MLM from a disguised pyramid scheme. In this paper, he fully presented the legal and
mathematical basis for applying the "retail test" to multi-level marketing.'^
Destiny Telecomm International, Inc., Tele-Card International, and International Heritage, Inc., had enrolled 40,000
distributors in that one state alone. The settlement agreement with Destiny Telcomm International stated: "...at least
70% of all North Carolina sales shall be retail sales to persons who are not connected in any way to the Destiny sales
force." The ruling also excluded from the 70% portion, sales to individuals who subsequently became Destiny
A more recent application of the retail sales standard was applied by the California Attorney General. In a May,
2009 settlement with the MLM scheme, Your Travel Biz.com (YTB), the ruling requires that at least 60% of sales
by YTB representatives must come from non-representatives (retail customers). The ruling also stripped YTB of
much of its "pay to play" revenue in which participants paid monthly fees for "websites." See
" Peter J. Vandernat and William W. Keep, Marketing Fraud: An Approach to Dijferentiating Multilevel Marketing
from Pyramid Schemes , 2 1 Journal of Public Policy & Marketing (Spring 2002) , at 139- 151.
©2010 Robert L. FitzPatrick
The Main Street Bubble 13
2. FTC Protection of Pyramid Selling Schemes
When Timothy Muris, a former attorney for Amway, was named by President George W. Bush
as head of the FTC, a series of actions unfolded to roll back FTC oversight of Amway and other
pyramid selling schemes and to halt prosecutions and enforcement. The shift in policy was
critical for Amway, which Muris' law firm previously represented. Amway's own "SA4400"
document, which it provided to new recruits, stated that less than 20% of all sales to distributors
led to retail sales. Later class action lawsuits by top Amway insiders asserted that less than 4% of
all Amway "sales" were ever made on a retail basis. Virtually all Amway revenue was sourced
ultimately and only from the investments of the "salespeople."
Retail sales were unprofitable and unfeasible due to high prices, no consumer demand, and low
retail profit margin available to the distributors. If FTC policies were maintained and Dr.
Vandernat's test and analysis were applied to Amway, it would fail and would become a target
of prosecution and with it many others would follow. The Main Street Bubble would burst in
which hundreds of MLMs leveraged the investments of millions of consumers, who could never
gain returns. The MLM house of cards was in jeopardy of imminent collapse.
1) Reassignment of FTC's Internal Expert on Pyramid Schemes
One of the first actions taken that resulted in protection of Biz Op Pyramids from future
prosecutions was to move Dr. Vandernat out of the area of MLM fraud investigation and
analysis. He was reassigned to an unrelated area of examining the accuracy of credit ratings.
Dr. Vandernat's extensive expertise and enormously valuable experience and international
reputation in pyramid scheme analysis were largely furloughed and no longer put to use on
behalf of US consumers.
2) Official Policy of No More Pyramid Scheme Prosecutions
Sources inside the FTC, who must remain anonymous, have verified that Dr. Vandernat's
reassignment was an early signal of an unstated but nonetheless official FTC policy in which
pyramid selling schemes would no longer be prosecuted to any significant degree. In fact,
this occurred. Over the next eight years, FTC prosecutions virtually stopped. One prosecution
of the MLM scheme, Burnlounge, was conducted but was initiated by the state of South
Carolina and arose from many complaints within the music industry (Burnlounge used an
endless chain income promise to sell downloaded music and entice musicians to place their
music in its library.)
The FTC imposed this virtual moratorium on MLM investigations despite increased
consumer activism against multi-level marketing schemes in the United States and dramatic
international prosecutions against them.
V Class action cases were brought against large MLMs, Amway, Herbalife, Usana, and Pre-
paid Legal, among others. All the cases made the same claim - that the MLMs are
pyramid schemes in violation of Section 5 of the FTC Act and other state statutes against
endless chain frauds.
V Another new and fast growing MLM and members of the DSA, Your Travel Biz.com,
was sued by the Attorney General of California as a "gigantic pyramid scheme."
■/The state of Texas prosecuted the MLM company, Mannatech. The Attorney General of
Texas, where the scheme is based, charged that Mannatech falsely claimed that its food
©2010 Robert L. FitzPatrick
The Main Street Bubble 14
supplements cured Down syndrome, cystic fibrosis, cancer and other serious diseases.
The company was subsequently fined $6 million and its founder required to pay $1
million to settle. Mannatech is a member of the Direct Selling Association and is publicly
traded on the Nasdaq stock exchange.
V The nation of China banned the MLM payment model in 2005 as an inherent pyramid
■/The government of England sought to close down the largest MLM, Amway, after
discovering that less than 1% of all English consumers who had invested in Amway 's
"business opportunity" had ever earned a profit.
The FTC protection of MLMs had a wider effect also on states. Without FTC resources and
support, state prosecutions, which had limited prosecution and investigation budgets, were
cut back. Large MLMs, with significant legal defense funds, were effectively granted
immunity from the FTC Act Section 5 .
3) No Enforcement of Past FTC Orders against MLMs
Not only were virtually no prosecutions initiated over the last eight years, but orders from
past prosecutions were not enforced. Representatives of Pyramid Scheme Alert met with and
repeatedly notified FTC officials concerning the violations of past enforcement orders
against the MLM, Nuskin."* This company had been fined two times for more than $1 million
each for making false claims about its products and about its claims of "income potential."
Similar consumer requests were made to reopen the Amway case in which the FTC was to
enforce court rulings regarding retail sales. In 2004, NBC Dateline aired a documentary
showing Amway distributors misleading consumers about income and the sources of the
money of Amway promoters. Consumer requests to the FTC, based on the airing of that
national news show, to reopen an investigation of Amway and enforce past orders were
4) Obscuring the Longstanding Interpretation of Section 5 of the FTC Act that a Multi-
Level Marketing Scheme without Significant Retail Sales Is a Per Se Fraud
On January 14, 2004, James A. Kohm, Acting Director of Marketing Practices, Federal Trade
Commission, wrote a highly publicized letter to Neil H. Offen, President, Direct Selling
Association, that, according to many in the MLM industry and the DSA, repudiated all past
FTC interpretations of Section 5 of the FTC Act and federal court rulings regarding the
fundamental requirement of retail sales (external revenue source). The letter is entitled:
"Staff Advisory Opinion - Pyramid Scheme Analysis."^"
This letter was cited twice by the former FTC Chairman, Timothy Muris, after he left the
FTC and served as a lobbyist for an MLM company. Mr. Muris referenced the letter to
'* Pyramid Scheme Alert sent consumer petitions to the FTC asking for enforcement of its orders against Nuskin and
cited many instances of violation. The petitions were ignored. See
" The NBC Dateline show can be seen in full on YouTube at ht tp://video. google. com/videoplay?docid=-
215989802739458876& . The formal letter from Pyramid Scheme Alert to the FTC asking for an investigation can be
read at http://www.pyramidschemealert.org/psamain/action/FTCCommissLtr.html
™ The full text of the letter can be read at
©2010 Robert L. FitzPatrick
The Main Street Bubble 15
support his arguments that the FTC should not impose disclosure regulations on MLM
Kohm's letter has been widely circulated by MLM recruiters to persuade consumers that
product purchases made by MLM distributors can count as retail sales, i.e., no external
revenue is required for legitimacy. Kohm's letter refers to "fees" as the primary payment
made by pyramid participants and obscures the far larger role of the product purchases. In
those purchases, which are effectively required by the pay plans prices are inflated 50-250%
and then 40-50% of the exorbitant price is transferred directly to the top of multiple levels of
recruiters through "top-loaded" pay formulas.
5) Colluding with Pyramid Lobbyists
While still in deliberations over rules to regulate the MLM industry, FTC officials, arguably,
held at last one ex parte meeting with lobbyists of the MLM industry in possible violation of
the Administrative Procedure Act ("APA"), 5 U.S.C.^^
Complying with the requests of the Pyramid Lobby, the FTC staff has recommended that all
multi-level marketing companies be exempted from its proposed new rule that was to require
more income disclosure on "business opportunity" schemes. This extraordinary
recommendation reversed the earlier FTC statements about the proposed rule in which
"pyramid selling schemes" were featured as a major source of "business opportunity" fraud.
The Direct Selling Association (DSA) lobbied to exempt its member companies.
In the case of one DSA member, Pre-Paid Legal, an MLM that has been the target of more
class action and private lawsuits for fraud than any others, the company argued that nearly
500,000 North American consumers "depended" on it for "income." In fact, 80% of Pre-Paid
Legal 's "salespeople" never make even one sale and only 2% make 10 sales. The mean
average "income" of the salespeople is about $5 a week. In short, the DSA presented a false
claim that disclosure rules would harm rather than protect the public. The FTC staff accepted
the arguments and recommended that MLMs be exempted.
6) Influence Peddling
In recent years, the FTC has experienced a pattern in which staff and even Commissioners have
been able to market their roles within the FTC to multi-level marketing companies, which lobby
against regulation and law enforcement, and MLM lobbyists have been brought in as FTC staff
to oversee MLM.
■/ George W. Bush appointed Timothy Muris to head the FTC. Muris' last job before chairing
the federal agency that regulates multi-level marketing was as an attorney with the antitrust
^' Timothy Muris' July 17, 2006 letter to the FTC as a MLM lobbyist can be seen at
http://www .ftc .gov/os/comments/businessopprule/5224 18-11 929 .pdf
^^ In the fall of 2008, the DSA issued a press release announcing the attendance of Lois Greisman, Associate
Director of the Division of Marketing Practices at the FTC, and Lem Dowdy, FTC Attorney, to a closed DSA
seminar October 23-24 in Alexandria, Va with DSA members. This was during the period of deliberations on a new
rule to regulate income disclosures of MLMs. The release stated that "attendees will have the opportunity to ask
questions and engage in an open dialogue with these (FTC) representatives, The general public had no opportunity
for rebuttal and at the same time was not even allowed the chance to offer further comment as the comment period
had ended. See http://www.dsa.org/press/press releases/index.cfm?fuseaction=show release&Document id=1928
©2010 Robert L. FitzPatrick
The Main Street Bubble 16
division of the firm Howrey, Simon, Arnold and White, LLP. The antitrust division of
Howrey counted among its largest clients the Amway Corporation.
V As the new chairman of the FTC, Timothy Muris appointed David Scheffman as the FTC's
new Chief Economist. Only a year earlier, Scheffman worked as an expert for the multi-level
marketing company, Equinox International, a member of the Direct Selling Association that
was prosecuted by the FTC for violating Section 5 of the FTC Act. David Scheffman testified
against the FTC and on behalf of the scheme. Scheffman argued that the Equinox business
model was legitimate, not a pyramid scheme. His claim was largely based on the assertion
that Equinox operated just like Amway. The FTC ultimately succeeded in shutting down
Equinox and recovering about $50 million for consumers. However, the FTC estimated that
consumer losses at the hands of Equinox exceeded $330 million.
V After leaving the FTC in 2004, Timothy Muris joined the Washington DC law firm,
O'Melveny & Myers. The website of O'Melveny & Myers lists Mr. Muris as "representing
Primerica Financial Services... in the Federal Trade Commission's Business Opportunity
Rulemaking proceeding." Primerica is a member of the Direct Selling Association and a
multi-level marketing company that, like all MLMs, could be negatively affected by a new
rule proposed by the FTC to regulate any business that sell a "business opportunity." A 2006
letter sent to the FTC on behalf of Primerica argued against the proposed FTC rule. The letter
was signed by Timothy Muris.
V While head of the FTC, Timothy Muris appointed J. Howard Beales III, as Director of the
Bureau of Consumer Protection. He had previously served at the Commission in the 1980s
during the "de-regulation" era. After leaving the FTC, Beales co-signed the letter to the FTC
with Timothy Muris on behalf of the MLM, Primerica, that argued against regulation of
multi-level marketing. Howard Beales was also known for his consulting work for Reynolds
Tobacco and his public defense of the Joe Camel advertising campaign.
V Jodie Bernstein after serving as Director of Consumer Protection at the FTC from 1997 to
2002 joined the law firm, Bryan Cave. In that capacity she lobbied the FTC on behalf of the
MLM, the Amway Corporation, arguing against regulation.
The law firm, Bryan Cave, has considerable experience in representing companies accused of
operating as pyramid schemes. It defended the notorious Ponzi operator Reed Slatkin and
previously represented Michael C. Cooper, president and chief executive officer of the MLM
company. Renaissance the Tax People, which was shut down by the state of Kansas as a
pyramid scheme .^''
The firm of Bryan Cave, which lobbies for and represents Amway, also counts among its newer attorneys:
• Frank Gorman, formerly legal advisor to the director of the Federal Trade Commission's Bureau of Consumer
Protection. Gorman left the FTC and joined the firm in 2003 when Ms. Bernstein also came over from the FTC
and began lobbying for Amway.
• Dana Rosenfeld, who served as the assistant director of the Federal Trade Commission's Bureau of Consumer
Protection and was senior legal advisor to Jodie Bernstein.
©2010 Robert L. FitzPatrick
The Main Street Bubble 17
II. The Political Influence of the Pyramid Lobby
This memorandum cannot conclude without addressing the question of why the FTC reversed
poUcy and protected companies that violate Section 5 of the FTC Act. The answer is plainly
political. Influence was purchased.
While many people are somewhat aware of large lobbying forces in Washington such as
Tobacco, Guns and Pharmaceuticals, few are aware of the powerful political influence of the
MLM industry which constitutes a Pyramid Lobby. Like the stealth marketing of MLM
companies, which is mostly carried out without national media, the Pyramid Lobby's work is
similarly low profile. This is partly due to its extraordinary purpose. MLM's top priority is not
just to curry favoritism or receive income at the public trough, but io prevent its extinction. This
requires thwarting law enforcement and foiling consumer protection. Only the tobacco industry
has as much at stake in its political lobbying and its public marketing campaign.
Much of the influence is carried out at the state level where legislatures and state Attorneys
General are lobbied to change or not enforce clearly worded statutes that ban business
opportunity frauds and endless chain schemes. One notable example is the state of Utah, which
has more MLM headquarters per capita than any other state. MLM brings more money into that
state than its famed skiing industry. While Utah has no lottery, it is the beneficiary of an industry
based on endless chain speculating. The actual odds of winning are significantly better at a Las
Vegas craps table than joining at the end of an MLM recruitment chain. ^"^ The Attorney General
of Utah, Mark Shurtleff, recently supported a "safe haven" amendment (SB 182) to Utah's anti-
fraud law that exempts multi-level marketing schemes. Shurtleff s largest political contributors
are MLM companies. He has been a featured speaker at MLM meetings, giving every
appearance of commercial endorsement.
But it is on the national level where the FTC is directly influenced. Here, the Pyramid Lobby has
focused virtually all its resources on the National Republican Party. Democrats are largely absent
from lists of recipients of MLM money.
In 2003, the Pyramid Lobby made its boldest and most overt move. It sought a national law that
would protect the industry, once and for all, from FTC and state law enforcement. A bill was
written by the Direct Selling Association and introduced in the House by Texas Republican, Joe
Barton. The bill, HR1220,^^ would have exempted endless chain schemes in which the money
transfer was laundered with product purchases. HR1220 was essentially a replica of the bill that
Utah adopted with Attorney General Shurtleff s endorsement, as have several other states, such
as Texas, where the DSA has held sway.
Co-sponsors of HR1220 were all Republicans, including Congresswoman Sue Myrick of
Charlotte, NC, whose main campaign funds were raised by Amway's largest distributor. Dexter
Yager who is based in the Charlotte area. Myrick was herself an Amway distributor. Other co-
sponsors included Vernon J. Ehlers of Michigan (from Amway's home district with Amway as
2"'' largest campaign contributor in 2006) and three Republican Congressional representatives
from Texas, among others.
^'* http://www.mlm-thetruth.com/ShockingMLMstats .htm
^' Full details about HR1220 can be found at
http://pyramidschemealert.org/PSAMain/news/DSABill/DSAbill analysis.html - Behind DSA
©2010 Robert L. FitzPatrick
The Main Street Bubble 18
A brief overview of the political activities, influence-buying and financial contributions of the
MLM industry, led by its largest member, the Amway Corporation, readily answers the question
of why the FTC, under President Bush's appointee, Timothy Muris, undertook a policy of
protecting illegal business practices. The answer is plain and simple. Protection of business
opportunity frauds was purchased.
• According to the consumer watchdog group Common Cause, Amway and affiliated donors
made soft money contributions to the Republican National Committee totaling $4,147,000
between January 1, 1991 and June 30, 1997. In April 1997, the co-founder of Amway Corp.
gave $1 million to the Republican Party, one of the largest single donations on record from
an individual. Federal Election Commission records show that Richard DeVos, said to be
worth $3.2 billion, and his wife, Helen, wrote two $500,000 checks on April 2, 1997 from
their personal accounts. DeVos is the former finance chairman of the Republican National
• In 2000, Amway "soft money" contributions to the Republican National Party totaled
$1,138,500. A publication of the Brookings Institute lists Amway among the top ten "soft
money" contributors to the Republican Party in 2000, just below and - only $500 less than -
• In 2004, the 527 "Progress for America" received major contributions from Amway. "The
latest crop of donors includes Amway founders Richard DeVos and Jay Van Andel, who
each chipped in $2 million." (Newsweek, "The Secret Money War," September 20, 2004.)
This 527 subsequently poured $28.8 million into supporting George W. Bush in 2004.^^
• Dick DeVos, the son of the founder of Amway is married to Betsy Prince, sister of Erik
Prince, the founder of the politically powerful military contracting firm of Blackwater
(recently renamed Xe). The Prince/DeVos marriage, which links Blackwater and Amway,
both based in Michigan, created what has been called the most politically influential family
in the Republican Party. Erik Prince has been a steady contributor to the Republican
• In 2006, Dick DeVos ran unsuccessfully for the governorship of Michigan. Had he won,
some analysts speculated he would have been a viable candidate for President.
• The above referenced wife of Dick Devos (sister of Erik Prince), Betsy DeVos, served as
chair of the Michigan Republican Party. In 2000 she won special status as a so-called
"Pioneer" after raising $100,000 for the Bush/Cheney campaign.
• In 1999, the inaugural fundraising event for the Republican Majority Issues Committee
(RMIC ) was held aboard the DeVos family yacht. The RMIC, a "527" organization, was
founded by Rep. Tom DeLay (R-Texas). The committee declared its intention to "identify,
educate, and mobilize conservative voters in key House races."
( http://www.motherjones.com/news/special reports/mojo 400/12 devos.html )
• Describing the events at the 2000 Republican Convention in Philadelphia, the New York
Times wrote, "For the party's top underwriters, there will be an array of gold-plated events in
Philadelphia, including cocktails with Gen. Colin L. Powell and an evening cruise on the
^^ http://www.sourcewatch.org/index.php?title=Progress for America Voter Fund
©2010 Robert L. FitzPatrick
The Main Street Bubble 19
Delaware River aboard the 'Enterprise,' the yacht owned by Richard M. DeVos, the Amway
• In the 2000 national election, the George W. Bush campaign used Amway 's voicemail
network to broadcast its message to tens of thousands of Amway/Quixtar distributors with a
"personal voicemail message" from Mr. Bush.
• For large speaking fees, former Presidents George Bush, Ronald Reagan, Gerald Ford and
former Vice Presidents Bob Dole and Dan Quayle have spoken at Amway-related functions,
as have former Republican heavyweights Newt Gingrich, Oliver North, and the SE Regional
Chairman for Bush-Cheney '04, Ralph Reed, among others.
• Regarding Amway' s formidable political lobbying power in Congress, syndicated columnist
Molly Ivins wrote in 1997, "Amway has its own caucus in Congress. Yes, the Amway
caucus. Five Republican House members are also Amway distributors: Reps. Sue Myrick of
North Carolina, Jon Christensen of Nebraska, Dick Chrysler of Michigan, Richard Rombo of
California and John Ensign of Nevada. Their informal caucus meets several times a year with
Amway bigwigs to discuss policy matters affecting the company, including China's trade
status." (Amway lobbied to get the US Dept. of Commerce to back its efforts to get China to
legalize the Amway pyramid pay plan. In 2005, this effort failed as China banned MLMs.)
Ivins also noted, "House Majority Whip Tom DeLay, a onetime Amway salesman, also
remains close to the company."
• Sen. Rick Santorum of Pennsylvania was a favored speaker at large meetings held by
Amway "kingpin" Fred Harteis, and received financial support from the Harteis family, their
recruits, and other Amway kingpins.
• A close personal friend and "spiritual advisor" to George W. Bush is a former high ranking
(Diamond) distributor with Amway and regular Amway convention speaker, evangelist Doug
Wead. Wead was President George H.W. Bush's liaison to the Christian Right. During the
early 1988 George Bush presidential campaign, Wead reported to son, George W. Bush. He
later served as Special Assistant to the President in the Bush Senior, White House. Time,
magazine referred to him as "the man who coined the phrase the compassionate
conservative." The phrase, "compassionate conservative" is closely related to a Rich DeVos
book title, "Compassionate Capitalism." Wead also researched and wrote about the children
of presidents, at the request of George W. Bush.
• At the 2004 Republican National Convention in New York insiders were feted aboard Dick
and Betsy DeVos' yacht, as well as Jay Van Andel's lavish 169-footer." (Kathleen Gray,
Detroit Free Press, 9/2/04)
• In a 1997 article, nationally syndicated columnist, Molly Ivins, reported that the budget
package passed by Congress that year provided a tax break "worth $283 million to one
Ivins noted, "The company and its top leaders have contributed at least $4 million to the
Republican Party during the past four years, so that's a $4 million investment in campaign
contributions with a $283 million payoff for Amway."
"The payoff for Amway was not in the original House or the Senate version of the tax bill,"
she wrote. "House Speaker Newt Gingrich intervened at the last minute to help get the
special tax break inserted in the bill."
©2010 Robert L. FitzPatrick
The Main Street Bubble 20
Describing this special tax break, Common Cause reported: "Buried in the 1997 budget and
tax deal is Provision C, Section XL The provision... reads: 'Modification of passive foreign
investment company provisions to eliminate overlap with subpart F and to allow market-to-
market election, and to modify asset measurement rule.' In other words... the provision
primarily benefits Amway Corp. and could be worth millions of dollars to (Amway)."
©2010 Robert L. FitzPatrick
The Main Street Bubble 21
Business Opportunity Scams, the Cruelest of Frauds
Today, millions lose their jobs; life savings are wiped out in the 401K meltdown; and many
suffer the disaster of home foreclosure. The government pours in money for "stimulus" and
"rescue." Legitimate businesses reorganize; citizens struggle to survive.
In this climate, the "product" in most demand - and in least supply - is an income opportunity .
This is what more than 10 million Americans and many more worldwide think they are buying
each year when they invest in a multi-level marketing business opportunity scheme. The
"opportunity" that is offered is, in fact, to sell the opportunity to someone else, a classic Ponzi.
Unwittingly, the consumer investors have been lured into the Main Street Bubble. Their
investments in fees and inventory were worthless or absurdly inflated in price. Collapse for the
new investors, one at a time, is inevitable as they each "fail" to recruit enough new investors.
The cruelty of the fraud extends beyond causing a financial loss. The schemes induce the victims
to spread the loss to their very own friends and relatives. Social and personal harm may exceed
the financial losses.
In violation of Section 5 of the FTC Act, business opportunity frauds have an enormous,
corrupting influence on the marketplace. They promote a predatory and deceptive reward system
in which one person's gain is based on many others' losses. They incorporate deception into the
model to conceal the inevitable fate of those solicited to join.
The scale on which MLMs promote and teach these predatory practices cannot be understated.
To take the example of only two of the hundreds of multi-level marketing schemes, as many as
10 million Americans have become Amway distributors over the last 20 years; 1.6 million
Americans have signed up as sales representatives of the MLM, Pre-Paid Legal (NYSE:PPD).
Virtually all of these investors quit these schemes after suffering losses. There are hundreds of
smaller versions of these two. There are very few families that have not been hit.
Each recruit is subjected to a powerful "message machine" in which gainful employment,
corporate America, and legitimate careers or businesses are derided. Government regulation is
portrayed as dictatorial and safety net services are reviled as socialism while the MLM pyramid
plans are presented as a last refuge for the average person. Covering up and diverting attention
from the massive consumer loss rates, the schemes' leaders indict the "failures" as quitters,
"pathetic losers" or as consumers who (despite their quitting the scheme within a year and never
buying the goods again) joined only out of love of the high priced products, not to earn an
Multi-level marketing is an Enron waiting to be exposed. Like Enron it claims to be the
"business model of the future", hides its actual operations from the public and regulators and
globally generates funds illegitimately, using some of that money to buy protection from
regulation or oversight.
Unless Congress intercedes and restores the FTC to its lawful duty of enforcing Section 5 of the
FTC Act against frauds of this type, they will continue to multiply, harm millions more
consumers each year and further strengthen their hold on the marketplace.
©2010 Robert L. FitzPatrick
The Main Street Bubble 22
©2010 Robert L. FitzPatrick
The Main Street Bubble i
From The Sunday Times of London
February 1, 2009
Pyramid swindlers unmasked
Ponzi scams are being laid bare by the slump
Dominic Rushe in New York
On its website, Agape World claims: "We provide the bridge to your future." The New York
lender specialising in short-term loans also claims to have been in business since 1999. The
date must be wrong. At the end of the millennium founder Nicholas Cosmo of Long Island,
New York, was serving 21 months in jail for mis-appropriating funds. Sadly it wasn't the
only number Cosmo had wrong.
Last week the 37-year-old was arrested, accused of swindling investors out of $370m
(£254m). Among his alleged victims were a group of disabled policemen and firemen, all
lured in by the promise of sky-high returns. Many lost their life savings as Cosmo blew their
cash on limousines, a baseball league and paying off fines from his earlier fraud.
As Cosmo was led off to court last week he was dubbed "the mini-Madoff '. Like Bernie
Madoff, the money manager accused of a $50 billion scam, Cosmo ran a "Ponzi" scheme,
paying investors with the money from new victims, the authorities allege. More than 1,500
individuals trusted their money to Agape World (agape means Christian love), and they are
not alone. At least six suspected multi-million-dollar fraud cases are being probed.
The Securities and Exchange Commission, the US financial regulator, has launched four
Ponzi investigations so far this year. It started 23 Ponzi cases last year, up from 15 in 2007,
and experts believe there are many more to come. A decade of lax regulation, booming
markets and changes in investment attitudes created the perfect environment for financial
scams. "It's like a petri dish for the bacteria of fraud," said Robert FitzPatrick, president of
consumer watchdog Pyramid Scheme Alert.
Collapsing markets have investors clamouring for their money across the US, and as they call
in their accounts more Ponzi schemes are being exposed. Last Tuesday the authorities
arrested Arthur Nadel, a Florida hedge-fund adviser who had gone missing amid accusations
that he defrauded clients of millions of dollars. Earlier last month Marcus Schrenker, an
Indiana financial adviser, was arrested in Florida after allegedly trying to fake his death in a
plane crash to avoid an investigation of his businesses. Schrenker parachuted from his plane,
which crashed just 200 yards from a residential neighbourhood.
When investigators found the wreckage they also found a national campground directory
with the pages torn out. Schrenker was arrested three days later at a Florida camp-site where
US marshals found him semiconscious inside a tent muttering the word "die" as he bled from
a self-inflicted gash to his left wrist.
Schrenker was not the first financier to fake his death in the latest meltdown. Last year
hedge-fund manager Samuel Israel Ill's 4X4 was found abandoned on abridge in New York.
The words "Suicide is Painless" were scrawled on the bonnet. After the authorities launched
The Main Street Bubble ii
an international manhunt, Israel turned himself in. He was convicted for his involvement in a
$450m fraud and sentenced to 20 years.
It's not just the US where Ponzi schemes are proliferating. In Canada 1,000 farmers recently
lost money in a bird-brained scheme that promised record returns for breeding racing
pigeons. Arlan Galbraith, owner of Pigeon King International, sold racing pigeons to farmers
for $500 and promised to buy back offspring for $50 each. Investors were told Galbraith
would sell the pigeons to rich Arabs. When the baby-pigeon market failed to hatch, many
farmers lost their life savings.
And there were riots across Colombia last year after the collapse of a series of firms that had
conned people with promised returns of 150%. One firm alone managed to take in more than
£110m in its last four months. Many investors had turned to the scam firms because they did
not trust the established banks. The criminals left taunting notes. "Dear investors, thanks for
trusting us and depositing your money," said one.
"Now, for being stupid and believing in financial witchcraft, you will have to work for your
The US, though, is the centre of the Ponzi renaissance. "These schemes by definition survive
by bringing in new money. Now everybody is pulling money out while no new money is
coming in they are all collapsing at once," said Robert Mintz, a former federal prosecutor and
now a partner at McCarter & English in New York. Mintz said in the instance of Madoff
there were signs that might have alerted the authorities, but most of these schemes were
difficult to detect until they fall apart.
FitzPatrick said the schemes were hard to detect because they so closely resemble legitimate
ventures. "The Ponzi scheme is like the evil twin of normal business. It can operate fluidly in
a regular environment," he said. And in a market where big promises were being made for
returns on investments, it offers the promise that those returns can continue, said FitzPatrick.
One factor behind the rise of the Ponzi has been the rise of hedge funds, said FitzPatrick.
Lightly regulated, opaque and invested in complex derivatives few of their investors
understand, hedge funds sound like scams themselves, he said. Investors who have heard of
the success of hedge funds are more likely to feel comfortable with a scheme that once might
have given them second thoughts. "The disguises have become better and better," said
He added that what was happening on Wall Street had been raging on Main Street for some
time. He believes pyramid schemes (the poor man's Ponzi) have doubled over the past 10
years as people look for extra income to meet rising healthcare, education, food and housing
costs. In the search for extra cash, practices that were once seen as illegal have been
legitimised, he said.
The same trend had also been seen in the housing market where fraudulent appraisals were
combined with fraudulent loans and sold en masse to Wall Street. "It goes all the way up the
line," he said. Even with the crackdown, FitzPatrick believes scams will proliferate. "Unless
there is very rigorous regulation, a lot of public education, people going to jail, I can't see it
The Ponzi scheme is essentially a confidence trick, so what better victims could there be than
investors who have lost their confidence in the established finance firms and are desperately
in need of cash? When all else fails, fraud will be there to meet their demands.
The Main Street Bubble
Charles Ponzi is the namesake
of the Ponzi Scheme
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FRAUD GONE WILD
Pyramid, Ponzi schemes disguised as valid investment opportunities
By staff Report
THE STATE JOURNAL-REGISTER Springfield, IL,
Posted Dec 23, 2008
The people taken in by Bernie Madoff s alleged Ponzi
scheme may be seen as greedy, but Robert FitzPatrick, a
nationally recognized expert on pyramid and Ponzi schemes
as well as other consumer frauds, says that isn't the case with
most people taken in by such frauds .
"I've been to meetings where they promote these things, and
I don't see a lot of greed in the room," he said. "I see
desperation, need, hope.
"What's not easy is to understand why it doesn't work," he
said. "Another problem is that they're everywhere. What
causes people to 'not get it' is the sheer prevalence of them.
"This is fraud that has gone wild. It's no accident at all that Madoff took some of our
smartest people for billions of dollars. There is no one dealing with these things."
He said the pyramid schemes are disguised as "matrix selling" and "cash gifting"
opportunities that assert their legality and legitimacy by citing lack of government action.
Madoff s scheme began to unravel when investors wanted about $7 billion back, and Madoff
couldn't pay them.
Securities and Exchange Commission Chairman Christopher Cox blamed his staff for failing
to catch the 70-year-old Madoff s scheme until now. He said the agency failed to act on
"credible, specific" allegations about Madoff dating back to 1999.
"Without regulation, it is not reasonable to expect the average person would be able to know
enough to avoid such schemes," FitzPatrick said.
"We believe that the markets are legitimate and relatively free of utter fraud, that regulators
are watching them, and that they have rules that are relatively transparent. But when you pull
out the regulation, you still have a public trained to invest," said FitzPatrick, president of
Pyramid Scheme Alert, an international organization formed to expose, study and prevent
illegal pyramid schemes.
He said organizers of Ponzi and pyramid schemes will tell people who question their
legitimacy that there is such strict regulation in this country, it's virtually impossible to run a
"The exact opposite is the case, and of course they know that," FitzPatrick said.
He said pyramid and Ponzi schemes work for a while — a long while in Madoff s case.
The Main Street Bubble iv
"He was paying consistent double-digit returns when no one else could for 10 years," he said.
"In that plan, nobody could get their money back because he was simply recycling the
money. There was no money being made other than that introduced by new investors."
Investors in Madoff s hedge fund were largely wealthy individuals or entities who may have
lost as much as $50 billion.
But FitzPatrick said the average person is more likely to encounter a Ponzi or pyramid in a
"business opportunity" scheme that requires an investment plus recruiting of new investors
— who are rarely called "investors" by the organizer.
"You'll go to a meeting that's carefully orchestrated," he said. "They're held in nice hotels.
The presenter is dressed nicely, and there will be people just like you and me giving
"The question will be asked, 'If it doesn't work, how does it keep working?'" FitzPatrick
The reason is that 60 percent to 70 percent of the people who are recruited quit every year,
without making a dime, and are simply replaced," he said. "The top people are making
money by churning the people under them every year."
To avoid such schemes, FitzPatrick said, you have to dig deeper and ask lots of questions.
"Do your due diligence like nobody used to have to do," he said. "In a Ponzi scheme, look at
how the organizer pays these extraordinary returns. Probe where the money comes from."
FitzPatrick said another warning bell in the Madoff scheme was that the statements he sent to
clients "basically were unintelligible."
One investor asked how the fund could be so successful and was told it followed a "split
strike conversion" strategy, which involved owning stock and buying and selling options at
the same time, he said, an explanation that makes no sense, either.
"You also may get, 'I can't tell you in-depth because then I'd be giving away my secrets,'"
FitzPatrick said Ponzi schemes, unlike pyramid schemes, don't churn investors.
"They just have to keep growing," he said. "He had to get new people in or get people who
thought they were earning money to reinvest it. But it was all on paper. They weren't earning
anything." FitzPatrick said there are other factors that slow detection of Ponzi schemes.
"The whole concept of investing is that you have to trust somebody," he said. "And if you're
going to trust someone, why not the former chairman of the Nasdaq stock market (Madoff)?"
The difference between the two schemes
The term "Ponzi scheme" is used primarily in the United States. Other English-speaking
countries do not distinguish between this and other forms of pyramid schemes.
In both pyramid and Ponzi schemes, early investors are paid by subsequent ones in an
unsustainable model. In a pyramid scheme, the investors recruit new investors, while in a
Ponzi scheme, the organizer does the recruiting.
Ponzi scheme origin
The Ponzi scheme is named after Charles Ponzi, an Italian immigrant who ran a scam in New
England in the early 1900s that promised investors in postal reply coupons a 40 percent
return on their money in just 90 days. He planned to use the difference in the exchange rate
The Main Street Bubble v
between the dollar and foreign currencies to buy and sell the international mail coupons at a
His company, Securities Exchange Co., and the scheme collapsed around 1920, however,
when people started calling for their money amid a growing investigation.
Ponzi had been paying the high return to early investors (and himself) with money paid in by
subsequent investors, rather than from the profit from any actual business. The system is
doomed to collapse because there are little or no underlying earnings from the money the
Ponzi actually bought only about $30 in mail coupons.
A couple schemes dissected
Canada has become a feasting ground for pyramid schemes, says Robert FitzPatrick, founder
of Pyramid Scheme Alert and co-author of "False Profits: Seeking Financial and Spiritual
Deliverance in Multi-Level Marketing and Pyramid Schemes."
"The Canadian government is completely compliant of these things," he said. "It becomes an
endorser by means of doing nothing."
Case in point is a Ponzi scheme disguised as a pigeon-breeding business called Pigeon King
International. The organizer claimed he had a plan to save the family farmer, and lured more
than 1,000 such farmers from the United States and Canada into the scheme.
Most lost all their investment.
The company is now bankrupt and closed. Returns were obtained from the investments of
later investors. The operator had no external market for the pigeons. He sold breeding
pigeons and then contracted to buy the offspring at agreed-upon prices. The selling prices of
the breeding pairs and purchasing prices of the offspring were arbitrary but promised very
high rates of return.
He lied to investors about markets and future sales of the pigeons and inflated their values.
Federal prosecutors in St. Louis recently have alleged that a securities firm there defrauded
customers of more than $4.5 million in what they called a Ponzi scheme.
Rate Search Inc. claimed it was able to find the best return on certificates of deposit by
searching nationwide, and made its money by taking a percentage of the interest.
But the company and its owner faked account statements to hide missing money and soothe
investors, while in fact it never bought some of the CDs customers thought they owned,
federal authorities said.
opportunities Staff writer, Chris Dettro can be reached at 217-788-1510
The Main Street Bubble vi
The Main Street Bubble
Robert L. FitzPatrick
1522 Lilac Rd., Charlotte, NC 28209
(704) 334-2047, Fax: (704) 334-0220
RFitzPatrick @ FalseProfits .com
http ://www .FalseProfits .com
Robert L. FitzPatrick is an expert in examining and revealing
deception and fraud in bogus home-based businesses. He is an
author, teacher and internationally recognized authority in multi-
level marketing schemes and pyramid sales fraud.
He is co-author of False Profits, the first book to critically
examine the multilevel marketing industry. He was featured on
ABC World News, and he was interviewed by correspondent Mike
Wallace on CBS 60 Minutes. He has been interviewed live on NBC Today show. He was featured
as an expert on Canada's CBC National News Program, Marketplace . Has been interviewed on
BBC radio news aired in the UK and quoted in the Wall Street Journal and New York Times.
False Profits was a featured resource at the 2003 annual meeting of the Association for
Professional and Practical Ethics. The related booklet. Pyramid Nation by Robert FitzPatrick, has
been translated to Chinese and used by government regulators in writing China's first laws on
In June 2005, Robert FitzPatrick was asked by the Central Bank of Sri Lanka to address banking
representatives from that country as well as India, Bangladesh, Bhutan, Maldives and Nepal in Sri
Lanka's capital, Colombo. The presentation was later published as part of a national consumer
education campaign against pyramid schemes.
Robert FitzPatrick has conducted seminars for staff of Federal Trade Commission, state Attorney
General's offices, US Postal Inspector and members of the White Collar Crime Center in
Richmond. He was a featured speaker at the 2006 annual meeting in San Francisco of the
Association of Certified Fraud Specialists and the 2003 of the National Association of Consumer
Protection Investigators. He has developed informational resources for consumers, journalists,
academics and regulators including a multi-media PowerPoint presentation and a statistical
analysis of the losses suffered by participants in multi-level marketing schemes. He also
published a widely read booklet on the landmark federal case brought against the Amway
Robert FitzPatrick founded and serves as president of Pyramid Scheme Alert, the first
international organization to expose and prevent pyramid scheme fraud. PSA's website,
http://www.pyramidschemealert.or g/. is visited each month by thousands of consumers,
regulators and journalists worldwide. He personally responds to hundreds of consumer and news
media inquiries. He has served as consultant and expert witness for Attorney General or State
Attorney offices in four states, the US Dept. of Justice, and in numerous cases involving
distributor fraud and pyramid schemes.
Deeply held convictions and values of fairness, trust, equity, and integrity drive Robert
FitzPatrick. His expertise is founded upon studies in a Catholic seminary leading to degree and
graduate studies in Sociology. His advocacy work began as a community organizer in the
neighborhoods of Charlotte North Carolina. He later organized and managed national trade
associations that advocated the interests of independent distributors in three industries . For more
than a decade, he provided strategic guidance and executive coaching in the field of
manufacturer/distributor relationships where factors of trust, integrity and sensitive
communications are critical to the business. His corporate clients included Fujifilm, DuPont,
Epson, and many others.